Asset protection. If the company’s business fails, the personal assets of the shareholder are protected
Although the entity is more complex, taxpayers seem to understand how they operate
Losses can be transferred within the group. Note new group consolidation’s rules proposed to apply from 1 July 2001
Companies have a Perpetual existence
The company can employ the taxpayer and provide salary packaging
It is easy to admit or retire partners by simply buying or selling shares, or alternatively by issuing shares
The tax is a 30% flat rate
Shareholders have a fixed interest in the company so they can be certain of their entitlements. Franked dividends can be passed to shareholders who can claim a refund of any excess imputation credits
Profits can be retained and taxed at the corporate tax rate when personal services income is not involved.
Deduction may be claimed for interest on borrowings to pay tax or refinancing shareholders loans or equity
The substantiation rules do not apply
Disadvantages
Companies are complex to administer
Regulated by complex Corporations Law
Costly to establish and run
50% CGT discount not available
Cannot distribute losses to individuals
Complex rules regarding the carrying forward of losses
No easy way for a company to pass tax-free amounts to shareholders without them being taxed in the shareholders hands
Division 7A applies in respect of loans and other certain payments to shareholders
Income and capital cannot be distributed in a flexible manner. The anti-streaming and franking credit-trading rules apply
Supplies to associates for below market value consideration can be subject to GST under Division 72 GST Act
Directors can be personally liable for the company’s debts in certain circumstances
Controlling individual test in the small business CGT concessions is difficult to satisfy. It cannot be satisfied where some of the shares are not owned by an individual
The taxpayer must terminate their employment with the company in order to obtain the small business exemption
New PSI rules can deny deductions and attribute income to the taxpayer providing the personal services
A change in share ownership can cause pre-CGT assets to be treated as post-CGT assets
A change in asset ownership can cause pre-CGT shares to be taxed as post-CGT shares
Companies can be costly to wind up
Disclaimer: This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in this article is for guidance only and should not be relied upon without obtaining professional advice having regard to your specific circumstances.
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